Even as President Barack Obama signed a compromise on student loan interest rates on Aug. 9, many Americans are concerned about the financial burden a college education will place on their families.
A study conducted for financial websites TheStreet.com and MainStreet.com found that one in three adults are either helping to pay for a child's higher education right now or are planning to do so. And 71 percent of them are worried about how they will cover the cost.
“People are really questioning what is the return on investment of a college education if people are shelling out $40,000 to $50,000 per year and coming out of college with low job prospects,” says Ross Kenneth Urken, TheStreet's personal finance editor. “They wonder if college is all worthwhile — besides the existential edification angle of thinking and growing your mind. From a financial perspective, people are having these doubts.”
The adults who are worried are mostly parents. Of those saving to pay for college, 79 percent are the students' parents, 10 percent are grandparents and 4 percent are aunts or uncles.
Urken says the worries are, in part, aftershocks from the Great Recession. Debt and low job prospects make people nervous about the cost.
“It creates this vicious circle,” he says, “where people then can't buy homes and get married later and put off having kids and don't buy cars because they are trying to pay off student loans that may or may not have launched them on a lucrative career path.”
There are some things parents and other people saving for college can do, Urken says, to reduce the cost of college and decrease the worry.
On average, Americans are saving $6,850 a year towards college, the survey says. They are putting this money into savings accounts (53 percent), some type of investments (31 percent), 529 savings plans or prepaid tuition plans (24 percent), life insurance (14 percent), and Roth IRAs (11 percent).
“There is no fool proof method and there is no silver bullet that is going to solve a family's ability to pay for college,” Urken says.
But he is concerned that so many Americans are relying on mere savings accounts to build their college nest egg instead of higher yielding investments.
“Investments are always risky,” Urken says, “but if you have a fixed growth vehicle you are greatly increasing the initial pot more than you would in a strict savings account. To me, that is better than just putting it in a bank savings account — although a big portion of our population is doing just that.”
Twenty-five percent of people who are saving for a child's college and who are making more than $75,000 a year use 529 savings plans. If they are making less than $75,000, that percentage drops to 11 percent using 529 plans.
Urken doesn't think this is because those people are less prudent.
“If you don't have the money to stow away in the 529 plan, you are not going to put it there,” he says. “They have to pay rent; they have to buy food.”
Saving money by spending less
“The best way to save money with college is thinking in-state,” Urken says.
He says many people believe that they need to be an in-state resident to get local tuition. There are exceptions such as Academic Common Markets — regions in the country where students can get in-state or reduced tuition pricing if the students' in-state colleges do not offer the same degrees.
Neighboring states may also have exceptions.
“It's a great tactic if you drill down and investigate a school that has a unique major that is not in your state, you can really net huge savings without very much effort,” Urken says.
For example, the University of Virginia is about $37,000 a year for out-of-state students, but for in-state students it is about $12,000.
“Right there you are saving a bundle,” he says.
Urken also recommends taking into account the U.S. Department of Education's College Affordability and Transparency Center on the Web at collegecost.ed.gov, to see which colleges give students the most value for their tuition investment.
“It is undeniable that the economic climate is very challenging for young people in terms of planning their education,” Urken says.
But, he says, focusing on alternatives to the more expensive schools, looking for better investments for savings and thinking outside the box may reduce some of those worries.